Weekend Links - 5/26/2017

QUOTE OF THE DAY

I’m convinced that having a long-term mindset and being more patient than other investors is one of the last true edges remaining in the markets. This is one of the few things that can never be arbitraged away by faster computing power or more intelligent hedge funds looking to make a quick buck. Ben Carlson 

CHART OF THE DAY

RETIREMENT FINANCE AND PLANNING

Why Retirees Cut Back on Spending: A Growing Pessimism, ItSeems, WSJ.  

The Mental Mistakes We Make With Retirement Spending. WSJ.  

The Relationship Between Guaranteed Income and SafeWithdrawal Rates, Mike Piper. In other words, holding all of the other variables constant, it’s reasonable for a person with a very high level of guaranteed income to spend from their portfolio at roughly three-times the rate of a person with a very low level of guaranteed income. 

The Impact of Guaranteed Income and Dynamic Withdrawals onSafe Initial Withdrawal Rates, David Blanchett.  Modeling dynamic withdrawals also affected safe initial withdrawal rates, although its impact was significantly less than that of guaranteed income, slightly less than return assumptions, but greater than the assumed portfolio asset allocation.

Active Retail Investors Are Useless, Right?

How many articles have I read in the last year that tell me that retail investors suck (and active managers, too, for that matter...except that they are not ding-ed as hard for behavioral bias as retail)?  A lot.  Personally, I think a set of systematic rules and a focus on something other than the S&P500 might make a lot of difference to a certain type of investor. Here for example is me put up against a pair of  trend following managed futures funds (12 billion and 500 million AUM; one is a mutual fund and the other is a private placement. I blocked the private name in case I have some clause in the placement that I could get hung up on by "publishing" results. The third line is a private placement I killed in 2016 so that doesn't count) looking only at time series and skipping over things like ratios, efficient frontiers, etc.  I think I might have posted something like this before but a combination of ego and irk-ed-ness at the articles I read motivated me to throw it out there yet again.  That ego reason must mean I am due for a drawdown.

This chart is after fund fees (and my expenses for my own strategy) but before adviser fees which are zero only for my alt-risk strategy which leans on but is not exclusively trend-following (but maybe it's close enough for the comparison...which it is since I often use MF to benchmark myself). Green is me:

This, of course, proves very little and what little it proves might be summed up by saying something like "you don't have to be paid an ungodly amount of money and manage billions in Connecticut to have a reasonable edge; don't let the pundits cow you out of actively (with rules, though) managing your own capital." Is five years long enough? Sure, why not?  At the pace of the modern world that seems like an eternity, certainly long enough for me to trust my suck-y retail methods.


See Not So Dumb at humbledollar.com.  I read this right after I posted the above.

Mortality Table Differences

I was curious about the difference between the 2013 SS life table and the 2012 SOA Individual Annuity Mortality Table (Basic Rates) for a 58 year old.  Just for the heck of it this is my best guess at mortality probabilities for someone my age using the two different tables.  The differences, I gather, reflect the different population of people that seek annuities vs. a more general population.   I'm not sure that this changes my planning because my planning conservatism already reflects the longevity risk implied in either table but if I were to use a longevity formula like a Gompertz equation I might move the mode out a bit further than I have been.  

LinkedIn Version of RH40

Here is the LinkedIn version of my write-up on the RH40 rule of thumb.  Same content as other posts done here but maybe presented a little better.

One Measure of the Cost of Self-Insuring Longevity

In the absence of annuitization, they say, one needs to plan for a "max lifetime" rather than an "average lifetime."  I've seen some papers on this, of course, but I was curious to see for myself what I could come up with for the following proposition:

IF:

- An average lifetime expectation is 85 (base case; but maybe closer to 82 for me)
- Max lifetime is, say, 95 (arbitrary, had to pick something)
- Endowment is 1,000,000 for the base case
- Start age is 60
- Spending is 3% (not 4%!) constant, inflation adjusted for the base case
- 50/50 two asset portfolio with some fee and tax assumptions thrown in
- No SS assumption
- No return suppression
- No spend trends, non-inflation spend variance, or spend shocks
- No stochastic longevity, and
- The base case risk turns out to be .05 fail rate risk

THEN:

1. What is the incremental difference in the endowment required to maintain same risk when the terminal age moves from 85 to 95, or alternatively

2. What is the incremental difference, for same endowment, in the spending required to maintain same risk for the same age shift?  i.e., what is the (maybe not "the" but what I want to call "a") "cost" of self-insuring under the assumptions above?


The answer based on a couple quick thumbnail sim runs where fail rates were rounded to whole number percents is:

1. I would need ~35% more (1350000) in the initial endowment to keep the fail risk constant[1]

2. I would need to have an initial spend rate (constant, infl adj) that is ~25% lower.


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[1] I have not read Waring and Seigel (2007) but according to Sexauer, Peski and Cassidy(2015 - Making Retirement Income Last a lifetime): W&S "estimated that the loss from not pooling is 34.5 percent of total capital saved." While it sounds like a slightly different question is being asked, it also seems of a piece with my post.

A Practical Application of Geometric Return Analysis: Retiring My Alt Risk Strategy [updated]

I recently updated my LinkedIn profile to "retired." [1] I did this mostly -- tongue in cheek -- to satisfy my girlfriend's need for me to say I'm retired rather than working as an active private investor (she's still working so me saying "I'm working" is a trigger).  But if I am going to retire I should really retire and hang up the active investing thing which is mostly me running my systematic alt risk strategy.  While it has been incredibly efficient over the last three or four years[2] it is a little like riding a bike in first gear: a lot of energy and motion for minor forward progress.  No reason not to at least consider hanging it up.

Since it is accretive, though, I need to either keep doing it or I need to replace it with something that is at least no worse.  And by worse I mean in the retirement finance sense.  I define that as: my cumulative return after a series of N "games" (really years; I was trying to get fancy there) net of consumption has to be about the same in the replacement strategy as it is in the baseline strategy.  N is a retirement milestone in the future I'll define later, returns are cumulative geometric, and consumption is spending of course. One could argue that at the margin there is no consumption if I am more than fully funded but where would the fun be in that since the consumption constraint makes it way harder.  

Weekend Links - 5/19/2017

QUOTE OF THE DAY

There are two kinds of pitches. Those that are clearly bad ideas, and those where it’s not clear at all if it’s a good idea or a bad idea. Michael Mauboussin 


VIDEO OF THE DAY - Animated Map of Unemployment Over Time

RETIREMENT FINANCE AND PLANNING

When Investment Professionals Discover Market Effects onRetirees: Why Drawdowns Matter: A Visual Demonstration, Willowstreet 

How Should Your Asset Allocation Look in Retirement? Pfau.   [how to market time without actually calling it market timing]

A Simple Age-Based Retirement Spending Rule-Of-Thumb ForWhen Your Dog Eats Your Simulator, W Selden. Sometimes you just want a simple, well-informed, easy-to-manage guess.  

One More Thought on RH40 - Dynamic Longevity

I was thinking about one more thing in evaluating my formula [ Age / (40 - Age/3)].  Longevity estimates are dynamic in real life but I have not been comparing RH40 to retirement calcs where Longevity changes with age. In other words, what would happen if I put RH40 up against a really simple model with dynamic longevity. Right now, using Blanchett's simple formula, I hew to a fixed "to-95" assumption.  But median terminal for someone my age is somewhere around 81-83 depending on the life-table used. Joe Tomlinson once told me maybe 88 is better.  Many retirement writers say use 95 just to be conservative.  But it's not just about setting a single assumption that is conservative. The median expectation for longevity extends out for each year survived while the survival probabilities still continue to go down. For example, using the SS 2013 life table the average expectancy at 95 is ~98, not 82 anymore, even though there are fewer and fewer survivors each year.

Playing Around With Some RH40 Math for context...

I tried to come up with a reason that this post might have any real serious functional purpose.  I couldn't do it or couldn't do it very well.  This post is really just me playing around with some math to contextualize my RH40 formula by using Blanchett's simple "dynamic" formula.  There is no advice here; I'm just goofing around.

Why my RH40 formula might actually be ok...

In my last "tongue-in-cheek" post I laid out my super cool formula for retirement spending.  It was a little jokey because I started with the desire for a formula before I had a reason to come up with one so it was kinda flawed from the start. On the other hand it is based on the legitimate retirement risk analysis of people more serious than me.  In the last post I said I'd consider looking at the fail rate risk output of my formula to see if, contra the 4% rule or maybe some others, it could plausibly deliver a more or less constant fail rate. That seems like a reasonable test. Let's see.

RiversHedge Unveils its Very Own New-to-the-World RH40 Retirement Spending Formula

Why, why, why would I add another retirement spending formula to the universe when there is already such a massive proliferation of formulas out there?  Well, first of all it matches ALL of my criteria for a good "pocket formula," unlike anything else I've seen, and second I've always wanted my own signature retirement formula. Don't you? You don't? Really? What's wrong with you?


My Criteria

Let's get right to the criteria.  This is some of what I want in a good retirement formula:

A "Ripcord" Simulation

Since Monte Carlo simulation is so irritatingly passive when it comes to retirement failure and so blasé about the constraint of only having one life to live, I asked myself this random question the other day:

What if, in a simulated context, I wanted to: 1) try to eliminate longevity risk by using annuity risk-pooling, 2) only make a risk-pool purchase at some future date and only if it's necessary, 3) use some minimal two-notches-above-indigent threshold level of lifestyle as a safety-net floor assumption, 4) be able take action while my portfolio is still viable and can still afford to make the purchase, and 5) make the purchase at an age when it is supposedly efficient to do so? Assuming that this engineers a way to mostly eliminate longevity risk (while still retaining a ton of other risk), how much more could I spend today? Or conversely, how much of a margin of error might I have in my current spending?

That's a great question. It's too bad I am not equipped to answer it. Or at least answer it with any serious rigor or credibility. That means, like I've done before, I'll try a back-of-the-napkin amateur hack to see what I can conjure up while also not imagining I am the first to either ask or attempt answer this question. I'm not going to present data or tables or a lot of charts because it's my own private data and also I weary of charting as summer approaches. This, by the way, is a much shorter post than I had planned mostly because the results seemed underwhelming and it saves me a ton of effort on that rigor thing. But, in turn, I guess you'll just have to assume I am being honest with myself…and you.

Weekend Links - 5/12/17

QUOTE OF THE DAY

Investing is extremely difficult, even for the best and brightest. Randomness plays a far greater role in our success or failure than we’re comfortable with. And most of the time it’s better to be lucky than good. ritholtz

CHART OF THE DAY

RETIREMENT FINANCE AND PLANNING

Should You Use a Rising Equity Glide Path in Retirement? W. Pfau.  Perhaps the best implication from research along these lines is to at least not think about continuing to reduce stock allocations throughout retirement, and also that it may be okay to start retirement with a lower stock allocation than the traditional withdrawal rate studies suggest. 

Recommended Assumptions & Other Inputs to Develop Your Actuarial Budget Benchmark, Ken Steiner. 

Advancing the Retirement Finance Ball a Couple Yards Down the Field

There is no plausible scenario, at my current stage in life, where it would be believable that I would want to or need to know more about partial differential equations, and yet...  And yet my PDE innumeracy intrudes on my ability to appreciate a paper like Approximate Solutions to Retirement Spending Problems and the Optimality of Ruin (Habib, Huang, Milevsky 2017).  For while there has been tremendous forward movement in retirement and life-cycle finance over the last 20 or 30 years, there are still those that continue to move the ball forward a few yards at a time, which this paper does. It seems unfortunate, then, that the paper is so opaque and/or my skills are not up to it because it looks like it confirms several of my retirement finance intuitions and biases.  And though it's lovely to have one's biases confirmed vaguely and in general -- that's the engine that makes modern far-bi-polar media institutions thrive so well these days, not to mention my Facebook timeline -- it's better (when it comes to the ret-fin math anyway) to "see," to use and to know if not to replicate. That last is my typical goal if I think I either have or can get the skills.

The unfortunateness of the opacity is also that it obscures some key points that I think either are or will or should become important. ...And important, especially in this current era, because longevity continues to extend (or at least ex-US because we here are having a middle-america drinking and opioid binge that for the first time is causing longevity to contract for some cohorts, something others have called an epidemic of despair), retirements seem to start ever earlier, and the one really great finance invention we had going for us (defined benefit pooled-risk pensions) is in full retreat.  Papers like these and math like they deploy are sometimes all that is left between us and late retirement hardship. It's not just nice to kinda know this stuff then, it's essential , in my opinion, that we try to understand them fully.

This is not comprehensive or exhaustive but here, at the risk of copy-pasting the whole paper, are some excerpted points that resonated with me -- after a half morning with a pen and a coffee -- while ignoring or subtracting out the equations

• In particular, Bayraktar and Young (2007) show that when utility is a power function and the consumption rate is proportional to wealth, the individual who minimizes lifetime ruin probability behaves like an individual who maximizes the expected discounted utility of consumption.
• In other words, from a life-cycle perspective, ruin is not a scenario or outcome that should be avoided at all costs. Rather, the rational objective should be to slowly and smoothly deplete financial resources accounting for the declining probabilities of living to very old ages.
• Rather, if indeed the retiree reaches that age they should plan to live off their pension annuity income (if it is available). Stated bluntly, if there is only a 5% chance of reaching the age of 100, it is quite rational to (i.) assume that you won’t and (ii.) reduce your consumption to the minimal pension level, if you do.
• We demonstrate that the resulting procedure is reasonably well-approximated by a deterministic algorithm originally presented in Milevsky and Huang (2011) – so long as the calculations are repeated on a frequent basis. [that's a little obscure but the repetition thing is key]
• According to the authors, there is no fixed withdrawal policy – the forward-looking spending rate is proportional to survival probabilities that is adjusted upwards for pension income and downward for longevity risk aversion.
• The initial spending rate critically depends upon a retiree’s risk aversion and pre-existing pensions.
• The optimal consumption (i.e. sum of all pensions and withdrawals from the account) is a declining function of age. Retirees should consume more today than what they consume in the future.
• Wealth trajectory declines with age and retirees with sufficient pensions spend down their wealth well ahead of reaching an advanced age.
• Converting some of the initial investible wealth into a stream of lifetime income increases consumption at all ages even when interest rates are low
• On the other hand, the general conclusion of a declining wealth and spending rate over time remains valid. Furthermore, the approximate solution based on the deterministic approach, whereby the rate is adjusted to the return of the portfolio and solved annually with an updated wealth level, agrees well with that of the full optimal control solution.
• Our approximate solution is obtained by computing the withdrawal rate using the solution under deterministic return on a yearly basis, while allowing the wealth process to be stochastic, thus adapting to current market conditions, when the model is parameterized to realistic (historical) equity and bond return coefficients. In other words, the simplistic approximation [e.g. Milevsky and Huang 2011]  – when calibrated properly and frequently – can indeed be used as an accurate guide for retirement spending policy.

I guess all this means is I need to go back and review the 2011 paper...

Why I Am Starting to Lose Interest in P2P Lending

"Losing interest" is a half pun because I am both losing interest (desire) and losing interest (yield). This is what happens to a peer-lending model as the portfolio ages and the defaults start to take over.

12% was the original pre-default target and 8-9% the post default target.  5% is more or less a hurdle rate. It is where I lose interest and start to think I have other options in the systematic alt world which I probably do.  The returns (blue line) are not simple arithmetic annualized returns, though that would have been easier and would have given a marginally rosier picture (not by very much). Returns, rather, are compounded month-over-month change in account value, that result projected to an annual horizon, and then that result mapped to linear returns at the end.  I may be wrong but I believe that is the right way to do it (per Meucci anyway).  The black line is a 12 month SMA. Any way you cut it I am losing steam....or maybe getting steamed.

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- diversified credit risk profile
- automated investment/reinvestment
- after 1% servicing fee

Weekend Links - 5/5/17

QUOTE OF THE DAY

The best traders hold themselves accountable; they hold themselves to the goals they set and they set their goals in measurable ways. BrettSteenbarger 

Markets don't have to go down and stay down to ruin your retirement. All you need is a bear market at the wrong time, and the sustainability of your income can be cut in half. Milevsky  

PICTURE OF THE DAY

RETIREMENT FINANCE AND PLANNING

Spending Down Your Assets in Retirement – Finding the“Goldilocks” Solution, Ken Steiner.   Judiciously utilizing the Actuarial Approach in combination with a more static approach may just provide the necessary adjustments that will enable retirees to find their Goldilocks solution.  

What’s the Most Appropriate Planning Age for Retirees? Pfau.  The relationship between how long you’ll live and your sustainable spending rate is a difficult piece of the retirement planning puzzle. Ultimately, a longer retirement horizon means spending less in order to sustain the available resources.  [following: my chart interpretation of Wade's table]